February 27, 2014 — The C.D. Howe Institute’s Monetary Policy Council (MPC) today recommended that the Bank of Canada keep its target for the overnight rate, the very short-term interest rate it targets for monetary policy purposes, at 1.00 percent at its next announcement on March 5, 2014. The Council further called for the Bank to hold the target at 1.00 percent through to March 2015.

The MPC provides an independent assessment of the monetary stance appropriate for the Bank of Canada as it aims for its 2 percent inflation target. William Robson, the Institute’s President and Chief Executive Officer, chaired the Council’s 84th meeting.

MPC members make recommendations for the Bank of Canada’s upcoming interest-rate announcement, the subsequent announcement, and the announcements six months and one year ahead. The Council’s formal recommendations for each announcement ­­are the median votes of the members.

Six of the seven MPC members attending the meeting favoured a 1.00 percent overnight rate at the upcoming announcement and again in April; two favoured an increase in the overnight rate to 1.25 percent by July, and three members favoured 1.25 percent by March 2015. Two members called for holding at 1 percent through March 2015. The seventh member attending the meeting called for a cut in the overnight rate to 0.75 percent, and favoured holding it there over the coming year.

While the MPC noted that year-over-year measures of the consumer price index (CPI) had moved higher since the Bank of Canada’s last policy rate announcement, a major theme of the discussion was the continued softness of inflation in major economies, even as estimates of disinflationary output gaps have tended to shrink. Several members noted that the correlations between the output gap and changes in inflation that have been central to monetary policy for decades appear to be too weak to provide guidance now.

In one member’s view, the fact that inflation has been persistently below target since early 2012 provided ample justification for a cut in the overnight rate. Others felt that, despite the disappointing response of Canadian exports and business investment to global demand, demand in Canada is strong enough to promote a return of inflation to target through 2015.

Among the motivations for those who looked for an increase in the overnight rate later in the year were the need to get it back to a more normal level as inflation returns to target, and lingering concern about domestic imbalances and potential financial instability stemming from low household borrowing costs. The latter issue prompted one member to recommend that the Bank reintroduce language about an eventual increase in the rate in its upcoming announcement.

The following table shows the votes of each MPC member, as well as the Council’s median vote, for the relevant Bank of Canada policy-rate announcements.